Twin Cities Power, an electricity trading firm based in Lakeville, and three energy traders have agreed to pay $4.3 million to settle federal civil allegations of manipulating the electricity market for a profit.

The company admitted in a settlement with the Federal Energy Regulatory Commission (FERC) that traders based in Calgary, Alberta, manipulated the electricity market on 144 days from January 2010 through January 2011 to profit on financial derivatives tied to the price of electricity flowing between the Midwestern and Eastern power grids.

“FERC says they violated the rules, and I have to go along with what FERC says,” Twin Cities Power CEO Timothy Krieger said in an interview.

Krieger said he fired the three traders in 2011 before the federal investigation was launched, then cooperated with FERC and agreed to settle as the company’s legal fees soared over $1 million. The company must pay a $2.5 million fine and return $978,186 in ill-gotten gains.

“We are an honest company,” said Krieger, who contended that executives in Minnesota had no knowledge of violations.

Twin Cities Power doesn’t generate electricity. It evolved in 2007 from a dairy commodities trading business that later was spun off. It has 34 employees at seven locations, according to a financial prospectus.

The three former traders also signed FERC settlements. Jason Vaccaro, a former vice president of the trading company’s Canadian affiliate, agreed to pay a $400,000 penalty. Allan Cho, former president and head trader of the Canadian affiliate, and Gaurav Sharma, a trader, agreed to pay $275,000 and $75,000 respectively.

Vaccaro was banned from trading electricity for five years; the other traders for four years. Twin Cities Power agreed to stop physical trading of electricity, but it still trades in electricity derivatives.

None of the traders could be reached to comment. In their settlements, the traders neither admitted nor denied wrongdoing.

Krieger said he now is the sole owner of the company, which has launched a business that sells electricity directly to consumers in some states, though not Minnesota. He said the company earned $8 million last year.

The trading infractions centered on a former electricity trading hub for southwestern Ohio, northern Kentucky and Indiana. Twin Cities Power once had authority to purchase power from utilities and physically trade and move it across the grid.

According to the FERC settlement, the traders took short and long swap positions on a derivative tied to the flow of electricity in and out of the Midwest power grid. FERC investigators concluded they manipulated flows of physical electricity to produce gains or avoid losses on their derivative positions. Instant messages and other communications among the traders described the manipulation, the settlement papers say.

In the past two years, FERC has taken 12 enforcement actions against companies for electricity market manipulation, according to data on the agency’s website.

Scott Daniel Johnson, an attorney who handles utility cases at the Washington law firm Akin Gump, said traders’ transactions in the physical and derivative electricity markets are increasingly common targets of FERC investigations.

“It is difficult to say whether that apparent uptick is simply the result of an increased enforcement focus on the part of FERC or represents an actual increase in that type of behavior over time,” Johnson said.

Johnson, who was not involved in the Twin Cities Power case, said in some enforcement cases, companies and traders have taken the position that their actions didn’t violate any specific rules.

Johnson said it is unusual to see a firm admit a violation, although FERC sometimes requires it in settlements, and it is relatively rare for individual traders to be sanctioned.

The refund from Twin Cities Power will go to the Midcontinent Independent System Operator (MISO) for distribution to unspecified participants in the power market. More than 350 companies, mostly utilities and trading houses, are part of the MISO market, which covers 15 states and Manitoba.

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